United Nations Development Programme

United Nations Development Programme

Energy subsidies in the Arab world costly & inefficent -- report

Apr 18, 2012

Six of the world’s ten largest energy subsidizers are found in the Arab world, led by Kuwait, Saudi Arabia, and Qatar. Each of these three countries charges their populations less than a third of international prices for fuel and electricity. While energy subsidies may be seen as achieving some of a country’s objectives, a new UNDP report 'Energy Subsidies in the Arab World' argues they are a costly and inefficient way of doing so.

Energy subsidies distort price signals, with serious implications on efficiency and the optimal allocation of resources. Energy subsidies also tend to be regressive, with high-income households and industries proportionately benefiting most from low energy prices.

However, despite such adverse effects, energy subsidies constitute an important social safety net for the poor in many parts of the Arab world, and any attempts to reduce or eliminate them in the absence of compensatory programmes would lead to a decline in households’ welfare and erode the competitiveness of certain industries.

Therefore, a critical factor for successful reforms will be the ability of governments to compensate their populations for the reduction or removal of subsidies through carefully designed mitigation measures that protect the poorest and assist the economy in its long-term adaptation. We argue that a reform of energy pricing mechanisms in the Arab world may be seen as beneficial from more than one perspective, and as offering potential paths for reform.

Nevertheless, this paper recognizes that the current political climate in the region will render the reform of domestic energy prices difficult in practice, such that reform may indeed be a medium- to long-term endeavour.